Keynesian Dynamics and the Wage-Price Spiral:Estimating a Baseline Disequilibrium Approach

We reformulate the baseline disequilibrium AS-AD model of Asada et al. (2004) to make it applicable for empirical estimation. The model now exhibits a Taylor interest rate rule in the place of an LM curve, a dynamic IS curve and dynamic employment adjustment. It is based on sticky wages and prices, perfect foresight of current inflation rates and adaptive expectations concerning the inflation climate in which the economy is operating. The implied nonlinear 5D model of real markets disequilibrium dynamics avoids anomalies of the Neoclassical synthesis (Stage I). It exhibits Keynesian feedback structures with asymptotic stability of its steady state for low adjustment speeds and with cyclical loss of stability when adjustment speeds are made sufficiently large. In the second part we estimated the equations of the model to study its stability features from the empirical point of view with respect to the feedback chains it exhibits. Based on these estimates we also study to which extent a Blanchard and Katz error correction mechanism, more pronounced interest rate feedback rules or downward wage rigidity can stabilize the dynamics in the large when the steady state is locally repelling. The achievements of this baseline disequilibrium AS-AD model and its Keynesian feedback channels can be usefully contrasted with those of the microfounded, but in scope more limited now fashionable New Keynesian alternative (the Neoclassical Synthesiso, Stage IIDAS-AD growth, wage and price Phillips curves,adverse real wage adjustment, (in)stability, persistent business cycles

Keynesian Dynamics and the Wage-Price Spiral:Estimating and Analyzing a Baseline Disequilibrium Approach

In this paper, we reformulate the theoretical baseline DAS-AD model of Asada, Chen, Chiarella and Flaschel (2004) to allow for its somewhat simplified empirical estimation. The model now exhibits a Taylor interest rate rule in the place of an LM curve and a dynamic IS curve and dynamic employment adjustment. It is based on sticky wages and prices, perfect foresight of current inflation rates and adaptive expectations concerning the inflation climate in which the economy is operating. The implied nonlinear 6D model of real markets disequilibrium dynamics avoids striking anomalies of the old Neoclassical synthesis and can be usefully compared with the model of the new Neoclassical Synthesis when the latter is based on both staggered prices and wages. It exhibits typical Keynesian feedback structures with asymptotic stability of its steady state for low adjustment speeds and with cyclical loss of stability -- by way of Hopf bifurcations -- when certain adjustment speeds are made sufficiently large. In the second part we provide system estimates of the equations of the model in order to study its stability features based on empirical parameter estimates with respect to its various feedback channels. Based on these estimates we find that the dynamics is strongly convergent around the steady state, but will loose this feature if the inflationary climate variable adjusts sufficiently fast. We also study to which extent more active interest rate feedback rules or downward wage rigidity can stabilize the dynamics in the large when the steady state is made locally repelling by a faster adjustment of inflationary expectations. We find support for the orthodox view that (somewhat restricted) money wage flexibility is the most important stabilizer in this framework, while monetary policy should allow for sufficient steady state inflation in order to avoid stability problems in areas of the phase space where wages are still not very flexible in a downward directionDAS-DAD growth, wage and price Phillips curves, nonlinear estimation, stability, economic breakdown, persistent cycles, monetary policy.

A Dynamic Analysis of Moving Average Rules

The use of various moving average rules remains popular with financial market practitioners. These rules have recently become the focus of a number empirical studies, but there have been very few studies of financial market models where some agents employ technical trading rules also used in practice. In this paper we propose a dynamic financial market model in which demand for traded assets has both a fundamentalist and a chartist component. The chartist demand is governed by the difference between current price and a (long run) moving average. Both types of traders are boundedly rational in the sense that, based on a fitness measure such as realized capital gains, traders switch from a strategy with low fitness to the one with high fitness. We characterize the stability and bifurcation properties of the underlying deterministic model via the reaction coefficient of the fundamentalists, the extrapolation rate of the chartists and the lag lengths used for the moving averages. By increasing the intensity of choice to switching strategies, we then examine various rational routes to randomness for different moving average rules. The price dynamics of the moving average rule is also examined and one of our main findings is that an increase of the window length of the moving average rule can destabilize an otherwise stable system, leading to more complicated, even chaotic behaviour. The analysis of the corresponding stochastic model is able to explain various market price phenomena, including temporary bubbles, sudden market crashes, price resistance and price switching between different levels.

Inference on forward exchange rate risk premium: reviewing signal extraction methods

The existence of risk premium is thought to be the reason why forward exchange rate is not an unbiased predictor of future spot exchange rate. In this paper we review two methodologies for inferring this unobserved risk premium based upon signal extraction mechanism. One approach relies on the theory of derivatives pricing that relates historical and risk neutral measures via market price of risk. The other approach specifies the risk premium in the historical measure directly. We compare these two methods in predicting future spot exchange rates and contrast these with that of random walk forecast. © 2009 Inderscience Enterprises Ltd

Dynamic oligopolies and intertemporal demand interaction

Dynamic oligopolies are examined with continuous time scales and under the assumption that the demand at each time period is affected by earlier demands and consumptions. After the mathematical model is introduced the local asymptotical stability of the equilibrium is examined, and then we will discuss how information delays alter the stability conditions. We will also investigate the occurrence of a Hopf bifurcation gving the possibility of the birth of limit cycles. Numerical examples will be shown toillustrate the theoretical results

An adaptive model of asset price and wealth dynamics in a market with heterogeneous trading strategies

The traditional asset-pricing models such as the capital asset pricing model (CAPM) of [42] and [34], the arbitrage pricing theory (APT) of [40], or the intertemporal capital asset pricing model (ICAPM) of [38] have as one of their important assumptions, investor homogeneity. In particular the paradigm of the representative agent assumes that all agents are homogeneous with regard to their preferences, their expectations and their investment strategies.1 However, as already argued by Keynes in the 1930s, agents do not have sufficient knowledge of the structure of the economy to form correct mathematical expectations that would be held by all agent

The evaluation of American compound option prices under stochastic volatility and stochastic interest rates

© 2013, Incisive Media Ltd. All rights reserved. A compound option (the mother option) gives the holder the right, but not the obligation, to buy (long) or sell (short) the underlying option (the daughter option). In this paper, we consider the problem of pricing American-type compound options when the underlying dynamics follow Heston’s stochastic volatility and with stochastic interest rate driven by Cox–Ingersoll–Ross processes. We use a partial differential equation (PDE) approach to obtain a numerical solution. The problem is formulated as the solution to a two-pass free-boundary PDE problem, which is solved via a sparse grid approach and is found to be accurate and efficient compared with the results from a benchmark solution based on a least-squares Monte Carlo simulation combined with the projected successive over-relaxation method

American Call Options Under Jump-Diffusion Processes - A Fourier Transform Approach

We consider the American option pricing problem in the case where the underlying asset follows a jump-diffusion process. We apply the method of Jamshidian to transform the problem of solving a homogeneous integro-partial differential equation (IPDE) on a region restricted by the early exercise (free) boundary to that of solving an inhomogeneous IPDE on an unrestricted region. We apply the Fourier transform technique to this inhomogeneous IPDE in the case of a call option on a dividend paying underlying to obtain the solution in the form of a pair of linked integral equations for the free boundary and the option price. We also derive new results concerning the limit for the free boundary at expiry. Finally, we present a numerical algorithm for the solution of the linked integral equation system for the American call price, its delta and the early exercise boundary. We use the numerical results to quantify the impact of jumps on American call prices and the early exercise boundary